chapter 14. to make informed decisions about a company generally based on comparative financial...

Chapter 14

To make informed decisions about a company

Generally based on comparative financial data

2Copyright (c) 2009 Prentice Hall. All rights reserved.

Perform a horizontal analysis of financial statements

Compares two financial statements to determine dollar and percentage changes◦ Compute dollar changes

◦ Compute percentage changes

4

Current year balance

Prior year balance

Dollar change Base period

Prior year balance

Copyright (c) 2009 Prentice Hall. All rights reserved.

5

2011 2010Dollar

changePercent change

Net sales revenue $428,950 371,000$ $57,950 15.6%Expenses:

Cost of goods sold 203,850$ 189,350$ $14,500 7.7%Selling and general expenses 99,350 93,000 $6,350 6.8%Other expense 6,750 5,000 $1,750 35.0% Total expenses 309,950$ 287,350 $22,600 7.9%

Net Income $119,000 $83,650 $35,350 42.3%

Verifine DesignsComparative Income Statements

Years ended December 31, 2011 and 2010


Form of horizontal analysis Base year selected and set equal to 100%

6

Trend %

Base year $

Any year $


Perform a vertical analysis of financial statements

Shows relationship of each item to a base amount on financial statements


Prepare and use common-size financial statements

10

2011Net sales revenue 100.0%Expenses:

Cost of goods sold 47.5%Selling and general expenses 23.2%Other expense 1.6% Total expenses 72.3%

Net Income 27.7%

Any Company Income Statement

Year ended December 31, 2011


Comparing a company with another leading company


Compute the standard financial ratios

15

Working capital

Current assets

Current liabilities

Current ratio

Current assets

Current liabilities

Acid-test ratio

Current liabilities

Cash + short-term investments

+ net current receivables

Results in a dollar

amount

Both result in a ratio


17

Inventory turnover

Cost of goods sold

Average inventory

Accounts receivabl

e turnover

Net credit sales

Average accounts receivabl

e

The higher the turnover, the

quicker it’s selling

The higher the turnover, the quicker the collections


18

Days’ sales in receivables

Net sales 365Average

day’s sales

Average day’s sales

Average net accounts

receivable


19

Current ratio

Current assets

Current liabilities

$173,000 $129,000?


20

Acid-test ratio

Cash + short-term investments

+ net current receivables

Current liabilities

$18,000 +10,000 + 53,000 $129,000

$129,000$81,000

??Copyright (c) 2009 Prentice Hall. All rights reserved.

22

Days’ sales in receivables

Net sales 365 Average day’s sales

Average day’s sales

Average net accounts receivable

$463,000 365 $1,268

$53,000 +75,000

2$64,000 $1,268

? days


24

Debt ratioTotal

liabilitiesTotal

assets

Times interest earned

Operating income

Interest expense


26

Return on sales

Net income

Net sales

Return on assets

Net income + interest expense

Average total assets


27

Return on equity

Net income – preferred dividends

Average common equity

Earnings per share

Net income – preferred dividends

Number of common shares outstanding


Trading on the equity

Increases profits during good times

28

Return on equity

Return on assets

is greater

than


30

P/E ratio

Market price per

share

Earnings per share

Dividend yield

Dividends per share

Book value

Common shares

outstanding

Common equity

Market price per

share


Suspect movement of sales, inventory, and receivables

Earnings problems Decreased cash flow Too much debt Inability to collect receivables Inventory buildup


chapter 14. to make informed decisions about a company generally based on comparative financial...

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